Classic Maritime Inc v Lion Diversified Holdings & Anor

A guarantee can be supported by consideration even if executed after the underlying contract. Where it forms part of a single transaction, the promisee’s performance, or abandonment of a right to insist on a different guarantee, may provide consideration; chronology is not decisive. A guarantor’s submission to English jurisdiction does not vary the principal debtor’s arbitration agreement where the debtor is not party to the guarantee and has made no necessary, unequivocal agreement or representation to accept court jurisdiction. Related arbitration does not justify staying proceedings against the guarantor merely because inconsistent decisions are possible. Frustration requires a radical change in the nature of outstanding obligations, not hardship, expense or commercial loss. Impossibility of storage does not itself establish impossibility of discharge. Summary judgment may be refused despite an improbable defence, with payment into court ordered conditionally.

Classic claimed against Lion under a guarantee of Limbungan’s obligations under an August contract of affreightment incorporating an earlier July contract. Limbungan sought a stay under the arbitration clause. Lion sought a case-management stay because the same issues would arise in arbitration. Classic sought summary judgment against Lion.

The issues included the enforceability of the guarantee for want of consideration, whether the first two voyages were frustrated or excused by force majeure because of storage and discharge difficulties, and the proper measure of loss. The court also had to determine whether Limbungan’s arbitration agreement remained effective and whether Lion had a real prospect of defending the claim.

1. Arbitration and jurisdiction. Limbungan’s application was granted. Under section 9 of the Arbitration Act, the claim against Limbungan arose under a valid arbitration agreement and had to be stayed. The guarantee was an agreement between Classic and Lion. Its provisions permitting separate or joint proceedings and submitting Lion to the English courts did not bind Limbungan or vary its arbitration agreement. No necessary implied agreement, representation or estoppel was established: see The Aramis [1989] 1 LLR 213, The Hannah Blumenthal [1983] AC 854 and The Gudermes [1993] 1 LLR 311.
2. Stay sought by Lion. Lion’s application was refused. The guarantee made Lion’s obligations independent of Limbungan’s. Classic could sue Lion without first pursuing Limbungan, and the possibility of inconsistent findings in arbitration did not outweigh the express agreement to separate proceedings and English jurisdiction.
3. Consideration. The obligation to procure a guarantee was an essential term and condition precedent to Classic’s performance of the underlying contracts. Acceptance of Lion as substitute guarantor gave good consideration because Classic surrendered its right to sue Limbungan for failure to provide the promised guarantee. Classic’s performance under the contracts was also consideration. The reasoning was analogous to Trans Trust v Danubian Trading [1952] 2 QB 297.
4. The guarantee and the underlying contracts formed a single transaction. The order in which the obligations were performed was therefore not decisive. Extrinsic evidence could clarify the anomaly between the guarantee’s date and the earlier contract, and could establish additional or larger consideration where it was not inconsistent with the instrument. The court applied Pao on v Lau Yiu Long [1980] AC 614 and Frith v Frith [1906] AC 254.
5. Frustration and force majeure. Frustration required a supervening event, without default, which radically changed the nature of the outstanding obligations. Hardship, inconvenience, increased expense or commercial loss alone was insufficient. The court considered the risk-allocation reasoning in Davis Contractors v Fareham UDC [1956] AC 696 and the forward-contract analysis in Larrinaga & Co v Société Franco Américaine des Phosphates (1923) 14 LlLRep 457.
6. Storage difficulties within companies in the same corporate group did not, without more, establish physical impossibility of discharge. The evidence had not eliminated alternative methods of disposal or discharge, and group decisions might make any frustration self-induced. The force majeure defence faced the same evidential difficulties.
7. Summary judgment and conditional payment. Under CPR 24.2(a)(ii), a defence must have no real prospect of success. Lion’s frustration and force majeure case had some prospect, although success was improbable, so summary judgment was refused. A conditional order was made under paragraph 24PD 5.1(4), requiring payment into court of $18,366,330.50. Costs of the hearing were costs in the case; costs of the stay applications followed the event. If payment into court was made, the New York Rule B security was to be reduced to cover the separate $5.729 million claim.
8. Damages. In an observation made in the context of the conditional order, the court treated the contract-rate and market-rate differential for cancelled fixtures as the relevant type of loss. An unexpectedly large fall in market rates did not, merely because of its extent, make that type of loss irrecoverable. The court explained its reading of The Achilleas [2008] 2 LLR 275 and referred to The Elena D’Amico [1980] 1 LLR 75 and the first rule in Hadley v Baxendale.